December 10, 2013 Real Estate Report - Can House Prices Rise as Sales Slow?

Here is an interesting picture. The S&P/Case-Shiller House Price index showed prices in the 20 largest cities increased 13.3 percent annually in September, the highest year-over-year increase since February 2006. Yet, existing home sales have slowed a bit and pending home sales have been lower for several months, according to the National Association of Realtors. How can home prices be rising at a time in which home sales are slowing down? The answer is found in two important numbers. For one, the percentage of distressed sales is falling as the foreclosure inventory shrinks. LPS reports that the foreclosure inventory is down 30% over the past year. Since distressed homes sell at a significant discount over non-distressed sales, it makes sense that the average sale price is rising. During the height of the housing crisis, the flood of foreclosed homes exaggerated the drop in home prices and on the way out of the crisis, the rise in home prices is now exaggerated by the lower numbers of these sales. Secondly, we still have a lack of inventory in many markets, especially at the lower end of the market. Housing sales are being held back because of this lack of inventory but at the same time we are not seeing slower housing sales cause downward pressure on prices. If there is more demand than supply, prices will be stable or rise regardless of the number of total sales. What does this mean for the future? If demand continues to rise, housing prices will continue rising or at least stabilize. The first factor -- distressed sales --- will become less of a factor in the future as we approach normalized levels of distressed sales. The key is demand. If the economy continues to produce jobs at a decent rate, then we will have a greater demand for the real estate market. That is what makes November's employment report interesting. Heading into December we had a series of numbers which pointed to a stronger jobs market, including the lowest number of first time claims for unemployment benefits since before the recession started and a strong October employment report. This made the markets optimistic before the numbers were released. And the numbers did not disappoint as the economy once again created more than 200,000 jobs and the unemployment rate dropped to 7.0%. Keith Stewart 773-529-7000